Moody's Investors Service on Tuesday assigned a Baa2 insurance financial strength rating (IFSR) to Malath Cooperative Insurance Company. The outlook for Malath is stable. Based in Saudi Arabia, Malath is a medium sized property and casualty insurer, underwriting motor, medical, property and engineering and various other The Baa2 IFSR of Malath reflects its good market position and brand, as the eleventh largest player in the Saudi Arabian insurance market, with a 2.1% market share in terms of gross premium written in 2018. Moreover, strong asset quality, driven by a conservative investment strategy with a low high risk assets (HRA) as a percentage of consolidated (shareholders' and policyholders') equity of 7.7% at YE 2018; (iii) good capital adequacy level, with gross underwriting leverage (GUL) of 2.3x at YE 2018. However, these strengths are partially constrained by the increasingly competitive Saudi Arabian property and casualty insurance market. Furthermore Malath is more concentrated to the market's most competitive lines of motor and medical which have historically pressured Malath's profitability, as is reflected in its volatile profits. For example, although the company reported improved profitability in 2018 with a combined ratio (COR) of 99.4% and return on capital (ROC) of 3.8%, in the first nine months of 2019 (9M 2019) it reported a deteriorated COR of 102.9% and a net loss of SR5.9 million. However, post the change in management at the end of 2017, Malath has taken steps to improve and stabilize profits with greater focus and controls around underwriting. As a result we expect to see more stable profitability going forward. The stable rating outlook reflects Moody's expectation that Malath will improve profitability and will grow its business with underwriting discipline thereby further strengthening its capital adequacy. According to Moody's, the rating could be upgraded if Malath profitably expands into the top 10 insurers in Saudi Arabia in terms of premiums whilst improving its ROC to over 6% and COR of under 98%; and/or it improves its capital adequacy with GUL of below 2x; and/or it profitably improves its business line diversification. Conversely, the rating could be downgraded if Malath loses significant market share in Saudi Arabia; and/or (ii) its asset quality deteriorates with HRA as a percentage of consolidated equity of over 50% or there is deterioration of the bank deposit ratings in Saudi Arabia to which Malath is exposed to and or loss of A-rated reinsurance support; and/or its capital adequacy levels weaken with GUL of over 3x; and/or its profitability significantly deteriorates with negative ROC's and combined ratios consistently over 100%; and/or its reserve adequacy deteriorates with consistent reserve strengthening required in subsequent years; and/or it undertakes significant borrowings with leverage levels reaching or over 15%. — SG
